The human retrovirus HTLV-I is the etiologic agent of adult T cell leukemia. The viral transforming protein, Tax, activates expression of both viral and cellular genes during transformation. The studies presented in this report focus on the ability of Tax to activate the CREB transcription pathway, which is essential for viral gene expression. Tax interacts with the cellular CREB protein and facilitates the binding of the coactivator and histone acetyltransferase CBP, forming a multimeric complex on the CRE-like sites in the HTLV-I promoter. To study the molecular aspects of Tax transactivation, we developed an in vitro transcription assay using a reconstituted chromatin template. Our data demonstrate that p300 and CBP facilitate transcription of a reconstituted chromatin template in the presence of Tax and CREB. The ability of p300 and CBP to activate transcription from the chromatin template is dependent upon the HAT activity. Moreover, the coactivator HAT activity must be tethered to the template by Tax and CREB, since a p300 mutant that fails to interact with Tax did not facilitate transcription or acetylate histones. p300 acetylates histones H3 and H4 within nucleosomes located in the promoter and 5' proximal regions of the template. Nucleosome acetylation is accompanied by an increase in the level of binding of TFIID and RNA polymerase II to the promoter. Interestingly, we found distinct transcriptional activities between CBP and p300. CBP, but not p300, possesses an N-terminal activation domain which directly activates Tax-mediated HTLV-I transcription from a naked DNA template. Finally, using the chromatin immunoprecipitation assay, we provide the first direct experimental evidence that p300 and CBP are associated with the HTLV-I LTR in vivo. We further demonstrate that histone deacetylases (HDACs) play an important role in the regulation of HTLV-I transcription. Using an in vivo chromatin immunoprecipitation assay, we find that HDAC1 is associated with the inactive, but not the Tax transactivated, HTLV-I promoter. TSA, an HDAC inhibitor, enhanced viral mRNA expression in HTLV-I-transformed cells and Tax transactivation from an integrated HTLV-I promoter. Consistent with these findings, overexpression of HDAC1 represses Tax transactivation. Importantly, biotinylated chromatin pull-down assays demonstrate that Tax inhibits/dissociates the binding of HDAC1 to the HTLV-I promoter. In vitro and in vivo protein binding assays demonstrate that there is a direct physical interaction between Tax and HDAC1. These studies provide the first experimental evidence that Tax negatively regulates the interaction of HDAC with the HTLV-I promoter.